Buying an Established Business

By

Sarah E. Needleman

July 31, 2011

Last year, Mark Shelstad set out to become his own boss after concluding that his portfolio-manager job had become unstable. But instead of trying to build a company from the ground up, the Chicago-area resident began searching for an existing one he could buy.

"I didn't have a creative idea worthy of starting a business from scratch," says Mr. Shelstad, who is in his mid-50s. Also, "I wanted to get up and running quickly due to my age."

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Hal Mayforth

After a few months of research and negotiations, Mr. Shelstad earlier this month purchased a 23-year-old lending-fraud investigation firm, which he renamed Armitage Investigative Services. He used a combination of personal savings and a five-year loan from the seller to cover the purchase price of more than $1 million.

If you're interested in entrepreneurship, but lack ideas or time to create a new business, buying an established company may be a wise alternative. You'll inherit a working infrastructure complete with resources you'd otherwise have to secure on your own, such as equipment and employees. You'll also ideally be taking over a known brand built on a positive reputation over many years' time.

Buying a business typically does require more capital upfront than if you were to build one anew. But asking prices have been on the decline in recent years due to the weak economy. And sellers are increasingly offering to finance a portion of the price for buyers who are unable to obtain bank loans.

The median asking price for a small business was $239,000 in the second quarter, down from $249,000 a year earlier, according to BizBuySell.com, a global online marketplace for small-business acquisitions based in San Francisco. For businesses sold in the quarter, the median selling price was $150,000, down from $155,000.

"It's a buyer's market," says Steven Zimmerman, president of Restaurant Realty, a business brokerage in Corte Madera, Calif.

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While he acknowledges that some firms are priced lower today because they're struggling to survive -- and not just because the owner wants to retire or relocate -- Mr. Zimmerman says such investments are still worth considering. "A buyer may be able to turn a problem into an opportunity," he says.

Take Mark Kauffman. About a year after getting laid off in 2009 from an executive position at a large hardware company, he purchased a Maaco Collision Repair & Auto Painting franchise in Minneapolis for roughly $700,000. While he says its profit margins were "less than stellar," he was confident that he could do a better job than the previous owner had.

Mr. Kauffman, 53, started by looking for redundant positions he could eliminate, which resulted in him letting go 15% of the company's work force. He also implemented a plan to retain customers most likely to need auto-repair services on a regular basis, such as taxi drivers, in addition to other changes. "You have to figure out where you can improve," he says, adding that sales are up 35% from a year ago.

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In buying his business, Mr. Kauffman took another step in line with current trends. He financed the purchase in part by setting up what's known as a Rollover as Business Start-up, or ROBS. With this option, the entrepreneur forms a corporation with a 401(k) plan and then rolls over his or her previous 401(k) account into the new one -- a move that doesn't trigger early-withdrawal penalties or taxes. The money can then be invested in the new venture. "I figured I could use the funds to invest in my own company and grow equity faster than just investing in the market," says Mr. Kauffman, who also received seller financing.

Messrs. Kauffman and Shelstad say they both first learned that the companies were for sale through business brokers, who help buyers and sellers vet one another. Brokers also oversee negotiations and handle the paperwork involved in sales transactions.

Both entrepreneurs say they found out about the companies within 24 hours of them being listed because they made a point of regularly checking in -- and developing a strong rapport -- with the brokers they targeted. "The more I would call these brokers, the more seriously they would take me," says Mr. Shelstad.

If you are considering working with a business broker, here are some things to consider:

What's the cost? Business brokers are typically hired by the seller so there is normally no cost to the buyer.

Do your homework. Before contacting brokers, determine the kind of business you'd like to buy. Research different industries and business types.

Where to look. The website of the International Business Brokers Association, ibba.org, has a free broker directory. You also can look for brokers' contact information in listings at business-for-sale websites such as BizBuySell.com and BusinessBroker.net.

Be honest. Let brokers know what you realistically can afford. "If you dance around finances, it's a waste of everybody's time," says Scott Evert, president of Sunbelt Midwest, a business brokerage. Besides, brokers and sellers "are going to do due diligence on you anyway."

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